Creating a Business Plan:

Creating a Business Plan:

 Perhaps the most important task an entrepreneur faces

is creating a business plan. An effective business plan
can mean the difference between a company that
succeeds and one that fails. A business plan is a
written document that provides an orderly statement of
a company’s goals, the methods by which it intends to
achieve these goals, and the standards by which it will
measure achievements.
Creating a Business Plan:

 Plans give the organization a sense of purpose. They

provide guidance, influence, and leadership, as well as
communicating ideas about goals and the means of
achieving them to associates, employees, lenders, and
others. In addition, they set standards against which
achievements can be measured. Planning usually works
best when the entire organization participates in the
process. Planning can combine good ideas presented by
employees and communicate information while making
everyone feel a part of the team.
Creating a Business Plan:

 Although no one format best suits all situations, a good small-

business plan will include a detailed time frame for achieving
specific goals, projections of money flows (both income received
by the business and funds disbursed to pay expenses), and units
for measuring achievement (sales, profits, or changes in market
share). A business plan should also cover the methods by which
the firm will achieve specific goals, procedures it will follows,
and values that define important standards for conduct. Perhaps
most important, the plan should always be open to revision.
 Creating a Business Plan
Before writing a business plan, a business owner should answer some questions:

 How would you explain your idea to a friend?

 What purpose does your business serve? How does your idea differ from those behind existing
businesses?
 What is the state of the industry you are entering? Who will be your customers or clients?
 How will you market the firm’s goods or services?
 How much will you charge?
 How will you finance your business?
 How will you measure your firm’s success or failure at specific time intervals?
 What characteristics quality you to run this business?
Creating a Business Plan

 Give special attention to the name of your

proposed business. Does the name reflect the
firm’s goals? Is it already registered by someone
else? Does it convey any hidden meanings to
other people?
Business Directory
 Business plan: written document that provides
an orderly statement of a company’s goals, the methods
by which it intends to achieve those goals, and the
standards by which it will measure achievements.
Business Directory
Be sure to do adequate research:

 You may gain useful insights by talking to suppliers in the

industry and to local licensing authorities. How many similar
businesses have succeeded? How many have failed? Why
what risks are specific to your industry? What markups are
typical in the industry’s pricing structure? What are common
levels of expenses and profit percentages? Another way to
gather information is to shop the competition.
BUSINESS PLAN:
Executive Summary:

 An executive summary should answer the who,

what, why, when, where and how questions for
the business in brief. Although the summary
appears early in the plan, it probably should be
the last element written.
BUSINESS PLAN

Introduction:

 An Introduction should give a general statement of the

concept, purpose and objectives of the proposed business,
along with an overview of the industry. This element
should include a brief description of the owner’s
education, experience, and training, with references to a
resume included later in the plan.
 BUSINESS PLAN

Marketing:

 A marketing section should describe the firm’s target market, its anticipated
competitors, and plans for distribution, advertising, pricing and locations of
facilities. This section should cover the background of the industry and industry
trends as well as the potential of the new venture. It should also point out any
unique or distinctive features of the business, including industry cycles such as busy
and slow seasons, and explain the reasons for choosing a particular start-up date.
 The marketing section should also cover equipment rental, leasing or purchase
costs, and the influences of traffic volume, neighboring businesses, demographics,
parking, accessibility, and visibility. Further discussion should review labor costs,
utility access and rates, police and fire protection, zoning restrictions, and other
government rules and regulations.
BUSINESS PLAN

Financials:

 The financial section should details an operating plan

forecast, a plan for obtaining capital, and a description of
plans for spending funds. The financial section should
also estimate assets and liabilities and analyze when the
firm will reach the breakeven point – the level of sales at
which revenues equal costs.
BUSINESS PLAN
Resumes of Principals:

 Resumes of the Principals of the business should be included in a

plan written to obtain funding.
 Within these sections, a business plan should cover some other
topics. It should indicate whether the firm will be organized as a sole
proprietorship, partnerships, or corporation and it should identify
when it will need to hire employees. Other important facts are job
descriptions for employees, the lines of authority in the business, a
risk management plan, including detailed information on insurance, a
list of suppliers with methods for assessing their reliability and
competence; and a policy for extending credit to customers.
BUSINESS PLAN:
 A business plan becomes part of a request for financing the lender will
examine the owner’s management skills and experience, the major risks
associated with the enterprise, available collateral, and the firm’s ability to
repay the loan. Potential outside investors are more likely to evaluate its
potential for profits and growth and place less emphasis on downside risks.
 If certain assumptions underlie the body of the plan, tie them into the
financial section. A plan for two outlets, for example, should provide cash-
flow projections that show how the firm will convert the costs involved with
each. Deal with both significant and insignificant variables. The bankers or
investors who analyze a plan may not know whether your firm will spend #
25,000 to install an exotic, high-tech part, but they will know that a telephone
system for 50 people will cost more than $ 250 per month. Carelessness with
seemingly insignificant variables can undercut credibility.
 BUSINESS PLAN
 Itemize monthly expenses rather than simply projecting annual amounts. A firm
with $100,00 in annual costs may not spend exactly $ 8,333 each month. Some
expenses are paid monthly and some only once each year. An owner who must
cover several large annual payments at the beginning of the year but failed to
report this in the financial section of the firm’s business plan will be running
back to financiers during the first month to explain problems with the cash-flow
projection not a good way to start. In addition to cash flow, a business plan
should project a detailed profit and loss statement. It must also state all
assumptions it makes about the conditions under which the firm will operate.
 The assembled plan should be neat and easy to use. It should include a table of
contents so that readers can turn directly to the parts that most interest them.
Also, the format should attractive and professional.
The Franchising Alternative:
 A major factor in the growth of small business is a unique
approach called franchising. Franchising is a contractual
business arrangement between a manufacturer or another
supplier and dealer. The contract specifies the methods by
which the dealer markets the good or service of the supplier.
Franchises can involve both goods and services. Starting a
small, independent company can be a risky, time-consuming
endeavor, but franchising can reduce the amount of time and
effort needed to expand. The franchisor has already developed
and tested the concept, and the brand may already be familiar
to prospective customers. Manufacturers setup systems of
franchised distributors to establish local retailers in each retail
location.
The Franchising Alternative:
 Franchising is also popular overseas. In a
recent six-month period, McDonald’s
opened more than 500 restaurants outside
U.S borders. The franchising giant now has
outlets in more than 100 countries.
 Franchising Agreements:
 The two principals is a franchising agreement are the franchisee and the
franchisor. The dealer is the franchise, a small business owner who contracts to
sell the good or service of the supplier the franchisor in exchange for some
payment (usually a flat fee plus royalties expressed as a percentage of sales by the
franchisee). The franchisor typically provides building plans, site selection help,
managerial and accounting systems and other services to assist the franchisee.
The franchisor also provides name recognition for the small-business owner who
becomes a franchisee. This public image is created by their familiarity with the
franchise in other geographic areas and by advertising campaigns, all or part of
which is paid for by franchisee contributions.
 The franchisee purchases both tangible and intangible assets from the franchisor.
A franchisor may charge a management fee in addition to its initial franchise fee
and a percentage of sales or profits. Franchise agreement often provide for the
franchisees to receive materials, equipment, and training from the franchisor.
Franchising Agreements:
 As for any other business property, a franchise purchaser bears the
responsibility for researching what he or she is buying. Poorly
financed or poorly managed franchise systems offer opportunities no
better than those in poorly financed or poorly managed independent
businesses. Although franchises are more likely than independent
businesses to succeed, many franchises do go out of business. The
franchising concept does not eliminate the risks of a potential small-
business investment, it merely adds alternatives. Advantages of
franchises include a prior performance record, a recognizable
company name, a business model that has proven successful in other
locations, a tested management program, and training.
Business Director:
Franchising:

 Contractual agreement that specifies the methods by which a dealer

(franchisee) can produce and market a supplier’s (franchisor’s) good
or service.
 Potential drawback stems from the fact that the franchisee is linked to
the reputation and management of the franchise. If customers are
unhappy with their experience at another franchise unit, this
dissatisfaction can harm the reputations of other franchisees in the
same area. A strong, effective program of managerial control is
essential to offers any bad impressions created by unsuccessful
franchises. Before signing on with a franchisor, potential franchisees
should carefully study its financial performance and reputation.
 Role of the Internet in International
Expansion:
 Some small businesses generate much of their annual
revenue from overseas sales, and the global reach of the
Internet forces online companies to recognize these
international markets quickly. Even if they don’t maintain
websites, companies hoping to sell their products in other
countries can use the Internet as an important information
resource. By surfing the Web, small-business owners can
find leads on potential customers, gather information
about overseas markets, and pinpoint government
restrictions.
 Growth Strategies for Small
Businesses:
 Licensing is a relatively simple way to enter a foreign market. Under a
licensing agreement, one firm allows another to use its intellectual property
in exchange for compensation in the form of royalties. Examples of
intellectual property include trademarks, patents, copyrights, and technical
know how. For instance, a firm that has developed a new type of packaging
might license the process to foreign companies.
 Sometimes a small firm can achieve exporting success by teaming up with
another organization that can provide services it can not afford on its own.
An export management company is a domestic firm that specializes in
performing international marketing services as a commissioned
representative or distributor for other companies. Another option for a small
firm is to purchase needed goods and sell its products internationally through
an export trading company, a general trading firm that plays varied roles in
world commerce, including importing, exporting, countertrading, investing,
and manufacturing.
Alternatives for Organizing a
Business:
 Whether small or large, every business fits one of three categories of
legal ownership: sole proprietorships are the most common form of
business ownership. However, the simple number of firms organized
according to each model may overstate the importance of sole
proprietorships and understate the role of corporations in generating
revenues, producing and marketing goods and services, creating jobs,
and paying taxes. After all, a corporate giant such as Wal-Mart, with
annual sales of over $ 200 billion, has a huge impact on the nation’s
economy, exceeding the collective effect of thousands of small
businesses organized as proprietorships.
 Table 5.2 Comparing the Three Major Forms of Private Ownership

Form of Number of Liability Advantages Disadvantages

Ownership Ownership

Sole proprietorship One owner Unlimited personal 1. Owner retains all profit 1. Unlimited financial
liability for business 2. Easy to form and dissolve liability
debts 3. Owner has flexibility 2. Financing limitations
3. Management deficiencies
4. Lack of continuity

Partnership Two or more owners Personal assets of 1. Easy to form 1.Unlimited financial
any operating partner 2. Can benefit from complementary liability
at risk from business 3. Expanded financial capacity 2. Interpersonal conflicts
creditors 3. Lack of continuity
4. Difficult to dissolve

Corporation Unlimited number of
shareholders; up to 75
shareholders for s
corporations
Limited 1. Limited financial liability
2. Specialized management skills
3. Expanded financial capacity
4. Economies of large scale
operations
1. Difficult and costly to
form and dissolve
2. Tax disadvantages
3. Legal restrictions
 Alternatives for Organizing a
Business:
 Each form offers unique advantages and
disadvantages, as outlined in Table 5.2. To
overcome certain limitations of the
traditional ownership structures, owners
may also use three specialized
organizational forms: S corporations,
limited liability partnerships, and limited
liability companies.
 Alternatives for Organizing a
Business:
 The most common form of business ownership, the sole proprietorship is
also the oldest and the simplest, because no legal distinction separates the
sole proprietors status as an individual from his or her status as a
business owner. Although sole proprietorships are common in a variety
of industries, they are concentrated primarily among small businesses
such as repair shops, small retail outlets, and service providers, like
painters, plumbers, and lawn-care operations.
 Sole proprietorships offer advantages that other business entities can not.
For one, they are easy to form and dissolve. (Partnerships are also easy to
form, but they are difficult to dissolve). A sole proprietorship offers
management flexibility for the owner along with the right to retain all
profits, after payment of personal income taxes. Retention of all profits
and responsibility for all losses give sole proprietors the incentive to
maximize efficiency in their operations.
 Alternatives for Organizing a
Business:
 Minimal legal requirements simplify entering and exiting a sole proprietorship.
Usually the owner must meet only a few legal requirements for starting one,
including registering the business or trade name to guarantee that two firms do
not use the same name and taking out any necessary licenses. Local governments
require that certain kinds of licenses be obtained before opening restaurants,
motels, retail stores, and many repair shops. Some occupational licenses require
firms to carry specific types of insurance, such as liability coverage.
 The ease of dissolving a sole proprietorship is an attractive feature for certain
types of enterprises. The advantage is particularly important for temporary
businesses set up to handle just a few transactions. For example, a part time
concert promoter could create a business to organize a single concert at a local
arena.
 Ownership flexibility is another advantage of a sole proprietorship. The owner
can make management decisions without consulting others, take prompt action
when needed and keep trade secretes where appropriate.
 A disadvantage of the sole proprietorship form is the owner’s financial liability for all debts of the
business. Also, the business must operate with financial resources limited to the owner’s personal
funds and money that he or she can borrow. Such financing limitations can keep the business from
expanding. Another disadvantage is that the owner must handle a wide range of management and
operational tasks, as the firm grows, the owner may not be able to perform all duties with equal
effectiveness. Finally, a sole proprietorship lacks long-term continuity, since death, bank-ruptcy,
retirement, or a change in personal interests can terminate it.
 Another option for organizing a business is to form a partnership. The Uniform Partnership Act, which
regulates this ownership form defines a partnership as an association of two or more persons who
operate a business as co-owners by voluntary legal agreement. Like sole proprietorships, partnerships
are easy to form. The legal requirements consists of registering the business name and taking out the
necessary licenses. Partnerships also offer expanded financial capabilities in cases where each partner
in vests money. The also usually increase access to borrowed funds compared with sole
proprietorships. Another advantages is the opportunity for professional to combine complementary
skills and knowledge.
 Like sole proprietorships, most partnerships have the disadvantage of unlimited financial liability. Each
partner bears full responsibility for the debts of the firm, and each is legally liable for the actions of the
other partners. Partners must pay the partnerships debts from their personal funds if it ceases operations
and its debts exceed its assets. Breaking up a partnership is also a much harder undertaking than
dissolving a sole proprietorship. Rather than simply withdrawing funds from the bank, the partner who
wants out must find someone to buy his or her interest in the firm.
Business Directory:
Sole proprietorship:

 form of business ownership in which the company is owned and operated by one person.
Partnership:

 form of business ownership in which the company is operated by two or more people who
are co-owners by voluntary legal agreement.
 The death of partners also threatens the survival of a partnership. A new partnership must be
formed, and the estate of the deceased is entitled to a share of the firm’s life insurance
overage for each partner, combined with a buy-sell agreement. The insurance proceeds can
repay the deceased partner’s heirs and allow the surviving partner to retain control of the
business. Partnerships are also vulnerable to personal conflicts. Personal disagreements may
quickly escalate into business battles. Good communication is the key to resolving conflicts
before they damage partnerships chances for success or even destroy it.
Corporations:
 A corporation is a legal organization with assets and liabilities separate from
those of its owner (s). Wal-Mart, whose annual worldwide sales have passed
the $ 200 billion mark, recently passed long time No. 1 ranked General
Motors as the largest U.S. based corporation in terms of sales. Third and
fourth largest are Exxon Mobil and GM’s rival, Ford Motor Co. The list of
the ten largest U.S. corporations contains four more manufacturers – General
Electric, IBM, Philip Morris, and Boeing as well as banking firm Citigroup
and telecommunications provider At & T. Each of the ten companies earns
annual revenues over $ 50 billion. Wal-Mart generates sales of over $ 1
billion every 36 hours.
 The corporate ownership form offers considerable advantages. First, because
a corporation acquires the status of a separate legal entity, its stockholders
take only limited financial risk. If the firm fails, they lose only the money
they have invested.
 Corporations offer other advantages. They can draw on the specialized skills of many employees, unlike
the typical sole proprietorship or partnership, for which managerial skills are usually confined to the
abilities of their owners and a small number of employees. Corporations gain access to expanded
financial capabilities based on the opportunity to offer direct outside investments such as stock sales. The
large scale operation permitted by corporate ownership also brings several advantages. Employees can
specialize in their most effective tasks. A large firm can generate internal financing for many projects by
transferring money from one part of the corporation to another. Long manufacturing runs usually
promote efficient production and allow the firm to charge highly competitive prices that attract
customers. One disadvantage for a corporation is the double taxation of corporate earnings. After a
corporation pays federal, state and local income taxes on its profits, its owners (stockholders0 also pay
personal taxes on any distributions of those profits they receive from the corporation in the form of stock
dividends.
 Corporate ownership also involves some legal issues that sole proprietorships and partnerships do not
encounter. The number of laws and regulations that affect corporations has increased dramatically in
recent years. To avoid double taxation of business income while achieving or retaining limited financial
liability for their owners, a number of firms have implemented modified forms of the traditional
corporate and partnership strictures. Businesses that meet certain size requirements, including ownership
by no more than 75 shareholders, may decide to organize as S corporations, also called subchapter S
corporations. These firms can elect to pay federal income taxes as partnerships while retaining the
liability limitations typical of corporations.
 Business owners may also form limited liability companies (LLCs) to secure the corporate advantage of
limited liability while avoiding the double taxation characteristics of corporations. An LLC is governed
by an operating agreement that resembles a partnership agreement, except that it reduces each partner’s
liability for the actions of the other owners.
 Changing Legal Structures to Meet
Changing Needs:
Before deciding on an appropriate legal form, someone
planning to launch a new business must consider dozens
of factors, such as these:
 Personal financial situations and the need for additional
funds for the business start-up and continued operation
 Management skills and limitations
 Management styles and capabilities for working with
partners and other members of top management
 Concerns about exposure to personal liability
 Organizing and Operating a Corporation:
 One of the first decisions in forming a corporation is determining where to locate its
headquarters and where it will do business.

Business Directory:

Corporation:

• business that stands as a legal entity with assets and

liabilities separate from those of its owner(s).
 Types of Corporations:
 Corporations fall into three categories: domestic, foreign, or alien corporations. A firm is
considered a domestic corporation in the state where it is incorporated. When a company does
business in states other than the one where it has filed incorporation papers, it is registered as a
foreign corporation in each of those states. A firm incorporated in one nation that operates in
another is known as an alien corporation where it operates. Some firms particularly large
corporations with operations scattered around the world – may operate under all three of these
designations.
 A fourth category of corporations Multinational corporations are firms with significant
operations and marketing activities outside their home countries. Examples include General
Electric, Siemens, and Mitsubishi in heavy electrical equipment and Time, Seiko, and Swatch in
watches. Electronics multinational Philips has set up headquarters for some of its product lines
in the pars of the world known for their leadership in developing such products. The European
company’s audio business is based in Hong Kong, and operations for its digital set-top box are
in California. Other multinational are paying more attention to what they can learn from
employees in different locales, rather than simply issuing directives from headquarters. Workers
at ST Microelectronics Malaysian factory dramatically reduced the time they needed to
assemble certain microchips, and the company used the techniques developed in Malaysia to
increase productivity of ST employees at its factory in Morocco.